As we move through the second half of 2021, there are some economic indicators which should be considered when developing strategies for an auto lending portfolio in 2022.
According to Bankrate data as of June 30, 2021, the U.S. average rate for a 60-month new auto loan started the year at 4.24 percent and has dropped to 4.18 percent. Similarly, rates on a 36-month used vehicle loan began at 4.53 percent and declined to 4.49 percent. The Federal Reserve has also signaled that it intends to keep interest rates low for the remainder of 2021 – and possibly into 2022.
Unemployment and growing debt are also important economic indicators to watch. According to Experian, the average annual percentage rates (APRs) on used and new car loans were 21.07 percent and 14.66 percent, respectively, for individuals with credit scores between 300 and 500. That compares with used and new car loan APRs of 3.71 percent and 2.41 percent, respectively, for those with top-tier scores between 781 and 850.
Economic Indicator: Low Inventory, Higher Prices = Greater Risk
While interest rates remain favorable for consumers, lending risk is only increasing as vehicle prices continue to inflate. According to Edmunds, the percentage of consumers who paid over sticker rose to nearly 13 percent in April 2021, compared to 8 percent in April 2020. For new vehicles, the Q1 State of Automotive Finance Report from Experian states that the average loan is now 110.18 percent over MSRP with the average amount financed increasing 4.6 percent year over year. For used vehicles, the rise in values is even more stark. The average used loan is now 119.79 percent over MSRP with the average amount financed rising 8 percent year over year.
Credit unions competing for auto loans now face a very precarious scenario. Do they follow the current trend of keeping credit standards as loose as possible to generate more volume, putting their loan portfolio at greater risk or do they begin to tighten credit standards and reduce their auto loan market share?
Many credit unions are working with a third option – protecting their auto loan portfolio with complimentary consumer protection products, like limited powertrain protection or a vehicle return policy. By including consumer protection products like these on their auto loans, credit unions have a better opportunity to compete for available loan volume while also protecting their portfolio.
For example, a limited powertrain warranty provides protection on some of the costliest components of a vehicle to repair. In the event of a breakdown, a member would not be put in the difficult scenario of choosing which bill to pay, their repair bill or their auto loan. Instead, they would be able to keep their vehicle on the road and their auto loan current with little impact to their monthly budget.
A vehicle return benefit would give a member the opportunity to return their vehicle to the selling dealership if an unforeseen event like involuntary job loss were to occur. Their credit would remain intact, and the auto loan would not go into default.
As you plan for 2022, be mindful of the economic indicators and leverage the tools that make auto lending a profitable part of your portfolio. With more than 40 years helping clients realize their growth potential, EFG Companies knows what it takes to give you an edge on the competition. Contact us today to get started.